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Economic Growth

The document discusses economic growth, including how it is measured, causes of economic growth, and growth in low-income and developing countries like China and India. Economic growth is measured by changes in real GDP and can be caused by increases in resources, technology, productivity, and aggregate demand. Sustained growth requires increasing productive capacity and aggregate supply over time.

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72 views6 pages

Economic Growth

The document discusses economic growth, including how it is measured, causes of economic growth, and growth in low-income and developing countries like China and India. Economic growth is measured by changes in real GDP and can be caused by increases in resources, technology, productivity, and aggregate demand. Sustained growth requires increasing productive capacity and aggregate supply over time.

Uploaded by

dmabirds_764297783
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Economics 9708

Lower Six

ECONOMIC GROWTH
Economic growth is a key indicator of macroeconomic performance. Economic growth is an
increase in an economy’s output. For people to enjoy more goods and services, output has to
increase by more than any growth in population. In such a case, GDP per head (per capita) would
increase.

Economic growth does not result in a rise in the living standards and quality of life of everyone
in an economy. It is also possible for a high proportion of people to achieve an improvement in
their living standards and quality of life even if economic growth does not occur, for example, if
there is a more equal distribution of income or a reduction in pollution.

Measurement of economic growth

Economic growth is measured in terms of changes in real GDP. The economic growth rate is the
percentage change in real GDP from one time period to another, usually a year.

Nominal GDP and real GDP

Nominal (or money) GDP is GDP measured in terms of the prices operating in the year in which
output is produced. It is sometimes referred to as GDP at current prices and is a measure that has
not been adjusted for changes in the price level (inflation).

Nominal GDP may give a misleading impression of how well a country is performing. This is
because the value of nominal GDP may rise not because more goods and services are being
produced but simply because prices have risen.

To calculate real GDP, economists measure GDP at constant prices (the prices operating in a
selected year). This ensures the effect of inflation that distorts nominal GDP is removed. For
example, in 2016, a country’s GDP is $800 billion and the price index is 100. In 2017, nominal
GDP is $900 billion and the price index is 120. Using the formula to calculate real GDP:

The price index used to convert nominal into real GDP is called the GDP deflator, which
measures the prices of products produced, rather than consumed, in a country. So it includes the
prices of capital goods as well as consumer products and includes the price of exports but
excludes the price of imports.
The causes of economic growth

Economic growth in an economy can be brought about by a number of factors, including:

 an increase in the number of workers


 an improvement in the quality of labour — for example, the acquisition of new skills
leading to a higher level of productivity
 a greater commitment to research and development, in terms of both invention (the
discovery of new products and new methods of production) and innovation (a process by
which a good or service is renewed by applying new processes or introducing new
techniques to create new value)
 an improvement in the state of technology » investment in capital stock
 a move towards more capital-intensive production
 increased mobility and flexibility of factors of production
 a more efficient allocation of resources
 development of new markets for exports
 a reduction in taxes on company profits to allow firms more funds to finance investment
 an upturn in the business (or trade) cycle, which will increase business confidence and
lead to firms increasing output.

If there is spare capacity, output can increase as a result of an increase in aggregate demand. For
instance, greater consumer confidence may lead to higher consumer expenditure and so an
increase in aggregate demand. Similarly, an increase in government spending and a cut in taxes
and the rate of interest may result in more factors of production being employed and output
rising. Making more use of existing resources can be shown on a production possibility curve.

The economy is initially producing at point X. Then the production point increases to point Y
and more goods and services are produced.
Economic growth resulting from higher aggregate demand can also be shown using an AD/AS
diagram. The diagram below shows an increase in aggregate demand in an economy with spare
capacity. The increase in aggregate demand brings into use previously unemployed resources,
and output (measured by real GDP) increases from Y to Y1.
In order to achieve economic growth that can be sustained over time, it is necessary for
productive capacity and aggregate supply to increase. There are two broad causes of such an
increase: more resources or better quality resources.

Economic growth in low-income countries

The main obstacle to increases in the quantity and quality of resources in some low-income
countries is the opportunity cost of allocating resources away from their current use. For
example, allocating more resources to education may mean that fewer resources can be allocated,
for instance, to healthcare. Producing more capital goods may mean sacrificing consumer goods
in the short run, which would lead to a decrease in living standards.

Economic growth in China and India

China has become one of the two largest economies in the world. It accounted for 30% of global
economic growth between 2012 and 2019. China’s increase in output has been driven by
increases in investment and exports.
India’s economic growth rate has been boosted by an increase in the size of the labour force and
advances in information technology. Between 2012 and 2019, India accounted for 16% of global
economic growth.

The consequences of economic growth

It is clear that economic growth can have benefits for a country, but it is also important to take
into account that there can be costs of growth.

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